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Bundling Health Insurance and Microfinance in India: There Cannot Be Adverse Selection If There Is No Demand

Author

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  • Abhijit Banerjee
  • Esther Duflo
  • Richard Hornbeck

Abstract

Microfinance institutions have started to bundle their basic loans with other financial services, such as health insurance. Using a randomized control trial in Karnataka, India, we evaluate the impact on loan renewal from mandating the purchase of actuarially-fair health insurance covering hospitalization and maternity expenses. Bundling loans with insurance led to a 16 percentage points (23 percent) increase in drop-out from microfinance, as many clients preferred to give up microfinance than pay higher interest rates and receive insurance. In a Pyrrhic victory, the total absence of demand for health insurance led to there being no adverse selection in insurance enrollment.

Suggested Citation

  • Abhijit Banerjee & Esther Duflo & Richard Hornbeck, 2014. "Bundling Health Insurance and Microfinance in India: There Cannot Be Adverse Selection If There Is No Demand," American Economic Review, American Economic Association, vol. 104(5), pages 291-297, May.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:291-97
    Note: DOI: 10.1257/aer.104.5.291
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    References listed on IDEAS

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    1. Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 597-652.
    2. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    3. S. Viswanathan & Adriano Rampini, 2013. "Household risk management," 2013 Meeting Papers 647, Society for Economic Dynamics.
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    Citations

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    Cited by:

    1. Lorenzo Casaburi & Jack Willis, 2016. "Health and skill formation in early childhood," UBSCENTER - Working Papers 018, UBS International Center of Economics in Society - Department of Economics - University of Zurich.
    2. Teresa Molina Millan & Karen Macours, 2017. "Attrition in randomized control trials: Using tracking information to correct bias," NOVAFRICA Working Paper Series wp1702, Universidade Nova de Lisboa, Faculdade de Economia, NOVAFRICA.
    3. Lau, Siew Yee & Parinduri, Rasyad & Lee, Yoong Hon, 2019. "Does Social Health Insurance Help Owners of Micro- and Small Firms Cope with Family Hardships? Evidence from Indonesia," MPRA Paper 95295, University Library of Munich, Germany.
    4. Francisco Galarza & Ingo Outes Leonb, 2016. "Do you want some cash-back? Assessing the demand for a no-claim rebate life-insurance product," Working Papers 16-04, Centro de Investigación, Universidad del Pacífico.
    5. Janssens, Wendy & Kramer, Berber, 2016. "The social dilemma of microinsurance: Free-riding in a framed field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 47-61.
    6. Abhijit Banerjee & Esther Duflo & Richard Hornbeck, 2018. "How Much do Existing Borrowers Value Microfinance? Evidence from an Experiment on Bundling Microcredit and Insurance," Economica, London School of Economics and Political Science, vol. 85(340), pages 671-700, October.
    7. Levine, David & Polimeni, Rachel & Ramage, Ian, 2016. "Insuring health or insuring wealth? An experimental evaluation of health insurance in rural Cambodia," Journal of Development Economics, Elsevier, vol. 119(C), pages 1-15.
    8. Shigute, Zemzem & Mebratie, Anagaw D. & Sparrow, Robert & Yilma, Zelalem & Alemu, Getnet & Bedi, Arjun S., 2017. "Uptake of health insurance and the productive safety net program in rural Ethiopia," Social Science & Medicine, Elsevier, vol. 176(C), pages 133-141.
    9. Bauchet, Jonathan & Chakravarty, Sugato & Hunter, Brian, 2018. "Separating the wheat from the chaff: Signaling in microfinance loans," World Development, Elsevier, vol. 106(C), pages 40-50.
    10. Fischer, Torben & Frölich, Markus & Landmann, Andreas, 2018. "Adverse Selection in Low-Income Health Insurance Markets: Evidence from a RCT in Pakistan," IZA Discussion Papers 11751, Institute of Labor Economics (IZA).
    11. Shigute, Zemzem & Strupat, Christoph & Burchi, Francesco & Alemu, Getnet & Bedi, Arjun S., 2017. "The Joint Effects of a Health Insurance and a Public Works Scheme in Rural Ethiopia," IZA Discussion Papers 10939, Institute of Labor Economics (IZA).
    12. Singh, Nirvikar, 2018. "Financial Inclusion: Concepts, Issues and Policies for India," MPRA Paper 91047, University Library of Munich, Germany.
    13. Banerjee, Abhijit & Duflo, Esther & Hornbeck, Richard, 2014. "(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance," CEPR Discussion Papers 10146, C.E.P.R. Discussion Papers.
    14. Sadia Hussain & Hamna Ahmed, 2019. "The role of bundling in promoting sustainability of health insurance: evidence from Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(3), pages 503-526, July.
    15. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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